Asia currencies decouple from China’s yuan

The former is losing tracking as recovery paths from the virus diverge
Newsfeed24 Sep 2020
Photo credit: AFP Photo

Counting on China as an anchor of strength has been a good tactic for traders of Asia’s emerging currencies. That link is losing traction as recovery paths from the coronavirus pandemic diverge.

Asia’s two-speed recovery is making it difficult to predict the fortunes of the region’s exchange rates amid mounting headwinds ranging from US-China tensions to the American presidential election.

“Given that much of the strength in the yuan is related to China’s economic resilience, which has not been replicated in much of the rest of the Asia, this suggests that yuan appreciation is going to continue to have a less pronounced impact on Asian currencies,” said an analyst. “Idiosyncratic factors have become more important for regional currencies.”

China’s gathering economic recovery has seen the offshore yuan strengthen 4.1% this quarter, beating all its developing Asian peers. The South Korean won is in second place, having gained 3.3%, while the currencies of Thailand and Indonesia, facing some of the largest economic challenges from the pandemic, have weakened.

While the yuan’s correlation with other emerging-Asian currencies seems to be breaking down, its relationship with those in the G-10 countries appears to be rising. The Chinese currency is increasingly influencing weekly price changes in the pound and commodity-linked currencies such as the Australian, New Zealand, and Canadian dollars, according to market analysts.

Domestic risks are likely to hinder emerging Asian currencies from keeping pace with the yuan, even as the Chinese currency’s strength and the weakening dollar create a favourable environment, said a currency strategist.

Weak exports will probably damp sentiment toward the won, while debt monetisation concerns weigh on the Indonesian rupiah, and the rupee will be hurt by India’s worsening virus outbreak, he said.

“The macro recovery in the rest of Asia has been choppy and uncertain at best, and there is also no strong portfolio inflow momentum,” he said. “These factors will cause the rest of the Asian currencies to lag behind.”– Bloomberg News.

The US Dollar Index closed 0.43% higher to settle at 94.389, the euro fell 0.41% to USD1.1660, the pound slipped 0.07% to USD1.2724, and the yen weakened 0.44% to 105.39 per dollar.

The information published by DBS Bank Ltd. (company registration no.: 196800306E) (“DBS”) is for information only. It is based on information or opinions obtained from sources believed to be reliable (but which have not been independently verified by DBS, its related companies and affiliates (“DBS Group”)) and to the maximum extent permitted by law, DBS Group does not make any representation or warranty (express or implied) as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions and estimates are subject to change without notice. The publication and distribution of the information does not constitute nor does it imply any form of endorsement by DBS Group of any person, entity, services or products described or appearing in the information. Any past performance, projection, forecast or simulation of results is not necessarily indicative of the future or likely performance of any investment or securities. Foreign exchange transactions involve risks. You should note that fluctuations in foreign exchange rates may result in losses. You may wish to seek your own independent financial, tax, or legal advice or make such independent investigations as you consider necessary or appropriate.

The information published is not and does not constitute or form part of any offer, recommendation, invitation or solicitation to subscribe to or to enter into any transaction; nor is it calculated to invite, nor does it permit the making of offers to the public to subscribe to or enter into any transaction in any jurisdiction or country in which such offer, recommendation, invitation or solicitation is not authorised or to any person to whom it is unlawful to make such offer, recommendation, invitation or solicitation or where such offer, recommendation, invitation or solicitation would be contrary to law or regulation or which would subject DBS Group to any registration requirement within such jurisdiction or country, and should not be viewed as such. Without prejudice to the generality of the foregoing, the information, services or products described or appearing in the information are not specifically intended for or specifically targeted at the public in any specific jurisdiction.

The information is the property of DBS and is protected by applicable intellectual property laws. No reproduction, transmission, sale, distribution, publication, broadcast, circulation, modification, dissemination, or commercial exploitation such information in any manner (including electronic, print or other media now known or hereafter developed) is permitted.

DBS Group and its respective directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned and may also perform or seek to perform broking, investment banking and other banking or financial services to any persons or entities mentioned.

To the maximum extent permitted by law, DBS Group accepts no liability for any losses or damages (including direct, special, indirect, consequential, incidental or loss of profits) of any kind arising from or in connection with any reliance and/or use of the information (including any error, omission or misstatement, negligent or otherwise) or further communication, even if DBS Group has been advised of the possibility thereof.

The information is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. The information is distributed (a) in Singapore, by DBS Bank Ltd.; (b) in China, by DBS Bank (China) Ltd; (c) in Hong Kong, by DBS Bank (Hong Kong) Limited; (d) in Taiwan, by DBS Bank (Taiwan) Ltd; (e) in Indonesia, by PT DBS Indonesia; and (f) in India, by DBS Bank Ltd, Mumbai Branch.